(Ab)Use of Complex Financial Instruments by Mutual Funds

44 Pages Posted: 22 Mar 2017 Last revised: 24 Feb 2019

See all articles by Paul Calluzzo

Paul Calluzzo

Queen's University - Smith School of Business

Fabio Moneta

Queen's University - Smith School of Business

Selim Topaloglu

Queen's University - Smith School of Business

Date Written: February 20, 2019

Abstract

We study the loosening of restrictions on leverage, short sales, options, and futures use at actively managed U.S. equity funds. We find that the allowance and use of these complex instruments are associated with poor fund performance. The underperformance is most acute when the fund is poorly monitored and when market returns are negative. We also show that these instruments impact fund risk in ways consistent with moral hazard and tournament behavior. Overall, our results suggest that mutual fund investors will benefit from choosing simplicity over complexity.

Keywords: mutual funds, leverage, short sales, options, futures, complex instruments, performance, risk, agency costs, moral hazard

JEL Classification: G11, G23

Suggested Citation

Calluzzo, Paul and Moneta, Fabio and Topaloglu, Selim, (Ab)Use of Complex Financial Instruments by Mutual Funds (February 20, 2019). Available at SSRN: https://ssrn.com/abstract=2938146 or http://dx.doi.org/10.2139/ssrn.2938146

Paul Calluzzo

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Fabio Moneta

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Selim Topaloglu (Contact Author)

Queen's University - Smith School of Business ( email )

437 Goodes Hall
143 Union St.
Kingston, Ontario K7L 3N6
Canada
613-533-6573 (Phone)
613-533-2321 (Fax)

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